ALTHOUGH LITTLE FANFARE FROM TODAY’S NCUA BOARD MEETING, THERE WAS SOME SIGNIFICANT MOVEMENT EVIDENT TO INSIDERS THAT MAY HAVE IMPACT ON MAJOR ISSUES FORTHCOMING

We have been keeping you updated for months on the unique political dynamic that currently exists on the three-member NCUA Board since President Biden designated Democrat Todd Harper in January to be the NCUA Chairman with the gavel on a Board in which the two other members are Republicans.

The NCUA Chairman supervises the staff on behalf of the Board and has initial control over the NCUA Board agenda. Yet, he cannot pass any regulatory actions, approve an agency budget or determine NCUSIF assessments on credit unions without two votes in favor of his proposals.

Nor can he stop two members of his Board from voting down any proposal he makes with which they disagree. And, if the Board majority is willing to do so, it can force items onto the NCUA Board agenda that the Chairman does not support.

This forcing of regulatory proposals or other Board actions onto the agenda over the Chairman’s objections does not happen often because most chairmen – with the ability to count to two – find a way to compromise with at least one of the other NCUA Board Members to ensure that the Chairman does not become viewed as an ineffective “odd man out” on his own Board.

Interestingly, apparently Chairman Harper has not to date been willing to negotiate a compromise with his two Republican colleagues on three key regulatory proposals that were approved as proposed rules back in December 2020 and January 2021 when now Board Member Rodney Hood was Chairman Rodney Hood – and when NCUA Vice Chairman Kyle Hauptman was making his early mark on the agency as a solid free market vote in favor of a more balanced and less activist approach to regulation than that advocated by Mr. Harper when he was NCUA Board Member and now that he is NCUA Chairman.

Those three regulatory proposals were the rule to allow Credit Union Service Organizations (CUSOs) to be able to lend in the auto lending and personal lending space as they already can in the mortgage, student lending, business lending and credit union arena; to allow SEG-based federal credit unions to count shared branches as service facilities for FOM expansion purposes regardless of whether they own an interest in the shared branching network; and a proposal to allow more mortgage servicing shared arrangements among credit unions that do mortgage lending.

None of the three should be controversial, but Chairman Harper dug in opposing all three when he was a Board Member and has continued that opposition to the point where he would not include the final rules from any of these three proposals to be added to the NCUA Board agenda even though the comment periods are long past closed and a final rule should have easily been readied by staff for Board action as early as late spring or early summer of this year.

The CUSO rule, for example, merely extends to CUSOs the lending authority they already have in the more challenging student lending, mortgage, business lending and credit card areas to the much more historically credit union risk managed auto lending and personal lending fields. It is hard to imagine that anyone today believes CUSOs such a PSCU in the credit card arena, CU Student Lending in the student loan field and MBL in business lending have been so risky and poorly performing over the years that NCUA would now want to limit further CUSO lending. Almost everyone in credit union land recognizes that these CUSOs are top performers and know of their success.

For some reason, Chairman Harper does not seem to recognize the value of CUSOs to the long-term competitiveness – as well as the safety and soundness through risk sharing and cost mitigation – of the credit unions he regulates.

In fact, credit unions know that, without the cooperative and collaborative risk sharing and cost savings represented by CUSOs such as the ones mentioned above (as well as CoOp, CU Revest, Trellance, BenefisCU and so many other CUSOs making an innovative difference in the credit union world), the credit union industry would not be as effective and efficient.

Cooperatives cooperating, how novel. Collaborators collaborating, actually inspirational in an industry of smaller institutions competing with banking competitors a hundred times their size. This rule is at least twenty years overdue.

Yet, it is having to be forced onto the agenda because of opposition of the NCUA Chairman that would not put it on the agenda even though it clearly has two votes in support. Commendations are due to Board Member Hood and Vice-Chairman Hauptman who today took action in a 2-1 vote with Chairman Harper voting no to put the CUSO rule on the October NCUA Board Meeting agenda.

That takes leadership and firm commitment to roll the board chairman on an important issue such as this and force the final rule onto the agenda.

Not only did Hood and Hauptman force the CUSO rule onto the October agenda, but in the same action they forced the service facility rule onto the November agenda and the mortgage servicing rule onto the December agenda.

This is an example of committed board members with a two-vote majority on a three-member board not to allow themselves and their viewpoints to be neutered by the board chairman’s recalcitrance in not allowing onto the board’s agenda proposed rules already voted upon in proposal form, commented upon by the public and with plenty of time for a final rule to be prepared for staff to be presented to the NCUA Board for final action.

Chairman Harper could have avoided this action today by merely sitting down with his two colleagues, or even with one of them, and working out a compromise that would satisfy some of his concerns with each of these proposals rather than just stonewalling them with a refusal to put the issues on the agenda.

Now Chairman Harper faces, unless he is willing to compromise, the very real possibility that he will be voted down by his own board not once, but three times, over the remainder of 2021 on rules that obvious compromises could be reached.

For example, Chairman Harper says he is concerned that the CUSO rule could be abused by CUSOs that might lend at rates far above the federal 18% usury cap. It would be so easy to establish in the rule that any CUSO must abide by the state usury cap in the state of its charter in any lending. It eliminates the concern and puts the enforcement of the usury cap for a CUSO, that is a separately chartered business and not a credit union that is chartered by NCUA, back where it belongs – with the state where the CUSO is chartered.

On the service facility rule, Chairman Harper has said that he is not in favor of ATMs or shared branches being considered service facilities for SEG expansion purposes or underserved area expansions. And he thinks credit unions should own an interest in a shared branch network before they can count a shared branch as a service facility.

The compromise is simple. Shared branches should be counted as service facilities period. They have become member service hubs for over twenty years and should certainly count – rather than requiring a credit union to either build or lease brick and mortar themselves – for SEG expansion whether or not the credit union owns a share in the shared branching network. (A service facility is where a member can get service, not whether the credit union owns or leases the space. No member cares whether the branch they use is owned or leased by the credit union. It’s about service. Ownership should not be required.)

However, it is perhaps reasonable that, although shared branches should count as service facilities for underserved areas, a case could be made that ATMs and ITMs might not should be. However, with today’s technology, there should be little question ATMs and ITMs should be absolutely counted for SEG and associational group expansion.

Board Member Hood has expressed his willingness to compromise to move these issues forward. And it is hard to imagine that Vice Chairman Hauptman, who has become a leading spokesman for NCUA to be more open to technological innovations such as crypto currency in its regulatory approach, would not also be open to finding a way to make this rule happen. Anyone who supports Bitcoin should certainly, as I feel confident he is, be far sighted enough to recognize how antiquated is the agency thinking that still relegates service facilities to actual physical locations anyway.

Most credit union members carry their branches around with them on smartphones in their pockets or tablets under their arms. And we are still debating what type of physical facility actually counts as a service facility. Amazing. That thinking has been outdated since the late 1990s.

In short, there is room for compromise on service facilities. And there are protections, as stated before, that can be put into the CUSO rule. And there certainly can be some safeguards put in place on the mortgage servicing rule, just as was done with loan participations when that rule was passed years ago, that could both protect consumers from confusion and credit unions from consumer complaints.

But there has to be a willingness to compromise, particularly on the part of the one vote when there are two on the other side.  There must be a “want to” to bring these issues to the fore and to finalize these rules.

Thus far, Hood and Hauptman have shown that willingness. And their leadership is evident.

Now Chairman Harper has the opportunity to reach across the aisle and provide leadership of his own to perhaps improve these rules without actually being an obstructionist to them.

His no vote today to even putting the issues on the agenda does not bode well for compromise. Perhaps he would rather be voted down for the next three months and make a strong speech each time against what his colleagues are doing. But his image as an effective NCUA Chairman that can help shape the direction of his own agency could be put in jeopardy by that approach.

Todd Harper has been in Washington for twenty-five years. He certainly is no stranger to the art of compromise. The success of his tenure as NCUA Chairman and his legacy to the agency and the industry it regulates may well hinge upon whether he joins his two colleagues in determining the direction of the agency or simply votes no as they do so.

This is going to be fascinating to watch. And the first volley into who will be the force making things happen at NCUA was fired today when Mr. Hood and Mr. Hauptman took action to force three needed, reasonable and overdue items onto the next three months of NCUA Board agendas over the objections of a sitting chairman.

SHARE INSURANCE PREMIUM ODDS WENT DOWN TODAY

On another significant issue today, no action was taken – which was, within itself, newsworthy action.

The staff reported that the equity ratio within the National Credit Union Share Insurance Fund (NCUSIF) was 1.23% as of June 30, 2021. While this ratio is below the 1.38% normal operating level set under the NCUA Board’s discretion, it is above the 1.2% ratio level below which a NCUSIF premium must be ordered.

Chairman Harper has been a vocal supporter of a NCUA premium and has encouraged Congress to increase the 1.2% equity ratio trigger for a premium to anything below 1.5%. Many had expected him to try to drive staff to treat the deposit influx of the past 18 months as a driver of a lower ratio in hopes of forcing the ratio below 1.2% and thus triggering a premium.

To his credit, he did not do so. And the numbers bore out the fact that the ratio is truly above 1.2% at 1.23%.

That brings the issue now to whether the 1.38% operating level is appropriate to the risk in today’s marketplace and on credit union balance sheets.  Board Member Hood during the discussion today raised the issue by stating his belief that the normal operating level should be 1.3%. Since Chairman Harper is already on record favoring a much higher level of 1.5%, it appears that Vice-Chairman Hauptman will be the deciding vote on whether the normal operating level should change up, down or remain the same at 1.38%.

The ramifications of Vice-Chairman Hauptman’s decision will give a strong indicator as to whether credit unions may be headed to a NCUSIF premium over the next eighteen months. Right now, it appears that a premium is a no go.

Interestingly, NCUA staff reported at today’s meeting that when the semi-annual invoices go out in October 2021 for the capital investment adjustment based upon insured deposits in the credit union system, their projections are that the equity ratio will be 1.28%. Barring a significant number of credit union failures/losses in the next nine months and/or a congressional action to follow Chairman Harper’s recommendation of a 1.5% premium trigger, a NCUSIF premium seems unlikely in the first half of 2022 – probably through all of 2022.

This is still an issue to watch as the NCUA Board dynamic comes into play, as earlier discussed on the agenda setting matter, on the premium question as well. But, based upon the staff report today and the lack of any action toward a premium, credit unions appear safe not to budget a NCUSIF premium into their 2022 budgets.

SUBORDINATED DEBT RULE AMENDMENT PROPOSED BEFORE THE WHOLE RULE EVEN GOES INTO EFFECT AND PREAPPROVAL QUESTION IS CLEARLY ANSWERED

In a unanimous vote (always good to see on an issue of significance), the NCUA Board approved a proposed amendment to the subordinated debt rule scheduled to go into effect in January 2022. The amendment would grandfather into the preapproved subordinated debt categories to count as supplemental capital any and all capital raised in the US Treasury Department’s Emergency Capital Investment Program put into effect in 2021 as a response to the COVID crisis.

Forty-four credit unions had received this type of supplemental capital in 2021. This action, once it is finalized, will allow those credit unions to keep the supplemental capital and not have to apply to NCUA in order to have it considered approved.

Interestingly and significantly, the discussion today about this amendment answered a question that has been lingering since the original subordinated debt rule was enacted by the NCUA Board in 2020.

Historically, any credit union wanting to issue supplemental capital through subordinated debt instruments would have to be low-income designated and submit an application for advance approval from NCUA before the credit union could offer the capital into the market.

Under the new rule, this right was extended to credit unions that are not low-income designated. The difference was that, while LICUs could count supplemental capital as net worth toward the 7% statutory requirement to be well-capitalized, a credit union that is not low-income designated would only be able to count the supplemental capital toward its regulatory Risk-Based Capital requirements.

It was also inferred by many credit unions and industry experts that the new rule would eliminate the NCUA preapproval requirement since the rule outlined so clearly the specifications and terms of subordinated debt that could be issued.

While NCUA staff never seemed to speak directly to the preapproval question when the original rule was approved and only emphasized the increased clarity and specifics outlined in the rule to guide credit unions in how to structure their subordinated debt offerings, many credit unions and experts believed that the new rule would allow credit unions to offer subordinated debt instruments without advance NCUA approval as long as they complied with the specifications outlined in the rule. NCUA examiners would then follow up at the next exam to ensure that the rule was followed.

Many credit unions, frustrated by the length of time, number of hoops they had to jump through and the number of deferrals or denials on supplemental capital applications to NCUA over the last five years, were pleased that the agency was going to allow them to proceed as long as they followed the guidelines and that NCUA would use the supervisory process to make sure they had complied.

This interpretation (or maybe hope) was dashed at today’s board meeting. Staff made it clear that NCUA preapproval would still be required for any supplemental capital program at a federally insured credit union. A credit union cannot proceed without advanced NCUA approval, despite the clarity and specifics now outlined in the new subordinated debt rule.

While this will frustrate many credit unions that looked forward to more empowerment from NCUA on supplemental capital, the real question will come down to whether NCUA becomes much more open to approve supplemental capital application plans when submitted.

If the agency begins to look for ways to get to yes on supplemental capital applications rather than seemingly to default to no while continually asking for more information and never seeming to get enough to approve the application, this new rule will be quite meaningful and even potentially a game changer as it opens credit unions to the capital markets for both building capital and investment purposes.

However, if the agency continues to make getting preapproval so challenging that the word gets out that it is not worth the trouble to apply, the subordinated debt rule will become quickly viewed as much more sizzle than steak.

Time will tell, but many credit unions were disappointed today that the subordinated debt rule still requires the previous NCUA preapproval that was the biggest single deterrent to low-income credit unions utilizing the previous supplemental capital process.

The proof will be in the pudding of the openness and flexibility of the approval process. With the guidelines so well established in the rule, hopefully NCUA will become a facilitator rather than a restrictor of this new opportunity for credit unions that has brought much positive response. It would be unfortunate for the subordinated debt rule to become, in reality, a false hope dashed by bureaucratic and regulatory process so restrictive that it is rendered basically useless.

Until next time.

Dennis Dollar